Short-Termism, Volatility Put Investors Temporarily in Timid Mood

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By Josh Levine
Editor, Levine's MicroCap Investor 

Even after the current sell-off, the S&P 500 is still within 4% of its recent highs, yet individual investors had long been behaving as if the bear was running loose for much of the past year, and especially in the first months of 2012.

According to a recent sentiment survey from the American Association of Individual Investors, bullish sentiment dropped from 31.2% down to 27.6%. This represents the lowest reading since last September when the S&P 500 was near its 2011 lows. Actually, sentiment is really not very far above the lows of 2009 and 2010.

The chart below from Bespoke Investment Group shows the remarkable divergence between the major US stocks and bullish sentiment today. It's notable that a similar pattern occurred throughout much of the first half of 2011.

 

 

Ever since the US economy entered a recession at the beginning of 2008, there was only one extended period when investor sentiment was at “extreme bullishness” levels. This occurred for several months between late 2010 and early 2011. Outside of those months, sentiment has been mostly average to worse.

“There does not seem to be one single factor that is dampening individual investor optimism,” says Charles Rotblut of AAII. Rather, he believes it is a combination of market volatility, concerns about the pace of economic growth, high gasoline prices, the ongoing European sovereign debt crisis and uncertainty about China's economy.

We can always find reasons to support the case for bullish and bearish sentiment. Too infrequently cited is short-termism, which breeds volatility. It has infected all aspects of the markets, economy, and life. The nearly maniacal appetite for immediate returns has been a primary contributor to the erosion in confidence among investors and in general.

Ever since the US economy entered a recession at the beginning of 2008, there was only one extended period when investor sentiment was at “extreme bullishness” levels. This occurred for several months between late 2010 and early 2011. Outside of those months, sentiment has been mostly average to worse.

Coming Around

This is all part of a long-term cycle that is running its course and as a new generation steps into positions of power, we will see a bigger emphasis on investing in future growth. The spirit of entrepreneurship and adventure capital is as vibrant as it’s ever been and I believe this will prove to be a powerful impetus for new ideas and wealth creation in the coming years.

Top beneficiaries will be small innovative companies like Acorn Energy (ACFN), Antares Pharma (AIS), Elephant Talk Communications (ETAK), Inovio Pharmaceuticals (INO) and other companies in the MicroCap Investor portfolio.

Economic and business conditions are gradually improving and large companies have more cash than they know what to do with it. A portion of these funds will definitely flow into small innovative companies through joint ventures, partnerships and acquisitions, and this will be another catalyst for micros and small caps.

Whether the flow of individual investor money into small stocks picks up soon is difficult to figure. Though confidence about the economy is building, investors remain fearful and show little inclination to jump back into the action with both feet. As history shows, however, investors will eventually find their way back into the markets at much higher valuations.

And as aggressive and knowledgeable microcap investors, my subscribers arrived early to the party and we'll be glad to sell our shares to the latecomers!

Subscribe to Levine's MicroCap Investor and get instant access to Josh's stock picks and inbesting insights.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Stocks , Investing Ideas , US Markets

Referenced Stocks: ACFN , AIS , ETAK , INO

Josh Levine

Josh Levine

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